Trusts and Asset Protection – Will a Revocable Trust Do It?
Today, I’d like to talk a little bit about trusts and asset protection. The question is can a Revocable Trust protect your asset? A lot of folks believe that if they go ahead and put stuff into their trust that that stuff in their trust is actually protected from creditors. And as a general role, the answer is no. But like most things within the law, we have to go ahead and we define certain terms when folks talk about trusts.
Generally, speaking when a client brings up a trust, they are talking about a revocable living trust or an RLT. This is one flavor of trusts (call it vanilla). The other flavor of trusts are irrevocable (call it chocolate).
As a refresher, a trust is a contract an agreement between the grantor, the person who establishes the trust and a trustee. The document (contract) will set forth certain rules for holding property and distributing income and/or property.
One way to visualize a trust, is to visualize a box. And there’s different types of boxes, right? If you buy a box of paper from Office Depot, often the box will have a cover that you’re able to take off so you can pull the reams of paper out of the box.
Because the box has a cover, you can the paper in the box with the cover on it, or you can get rid of the cover and just leave the paper in the box. If you use the box for storage without the cover on top that is an open box. . An RLT or revocable living trust is an open box. You can go ahead and put your stuff in the box. But because it is a revocable living trust, you the grantor, have the ability to go into that box any time that you want to, and you can do anything you want to do with the stuff in the box, you can give it away , you can sell the stuff and keep the money, you can take the stuff out of the box and retitle the stuff.
You can do whatever you want with this stuff and because you’re able to do whatever you want with the stuff, it is not subject to asset protection. Why? Because the general rule is this. If you are able to get at the stuff, the stuff is subject to somebody from the outside, whether it be a creditor or a predator. So a revocable living trust provides no creditor protection.
On the other hand, if you set up some controls in your trust, where are you or somebody that you’re trying to protect is on able to reach into the box and take stuff out to them directly. Take principle out, directly sell things in the trust, directly liquidate things in the trust directly. Then it’s sort of a closed box, right?
In a irrevocable trust, we put the cover back on the box of paper. Because there is a cover on the box, and you can’t reach in the box anytime you want to, creditors also cannot get into the box. You see the person that you’re trying to protect, whether it’s you, a kid, or a spouse, they cannot go into the box and take the stuff out directly. They have to do some other things in order to get the stuff out of the box. So the general rule is this. If you have direct access to your stuff in the trust, so does a creditor or someone who sues you. On the other hand, if you do not have direct access to take stuff out of that box and to liquidate it, then there is asset protection.